Inventories are undervalued in periods of rising prices. This is a disadvantage of which of the inventory cost-flow assumption?
A) First-in, first-out
B) Last-in, first-out
C) Perpetual
D) Average cost

Question

Quizplus · Accepted Answer

This disadvantage of undervaluing inventories during periods of rising prices is specific to the Last-in, first-out (LIFO) cost-flow assumption. LIFO assumes that the last items purchased are the first items sold or used, meaning that the cost of goods sold is based on the most recent, and usually higher priced, inventory purchases. As a result, the cost of older, lower priced inventory is left on the balance sheet as inventory, which becomes undervalued as prices rise.

Inventories Are Undervalued in Periods of Rising Prices